Silver equities ‘pushing valuation limits’

It has been a tremendous year so far for silver mining stocks. The price of silver has climbed a modest 10% in 2014, but CIBC World Markets analysts calculated that the sector’s equities have jumped between 25% and 60%.

This is not entirely surprising: silver equities are highly leveraged to the silver price, and a rising price has a multiplier effect on their earnings. All the same, the analysts are concerned the equities are running a little too hard, noting they have outperformed gold equities (relative to metal prices) and appear to be “pushing valuation limits.”

“Anybody taking a close look will notice significant gains coming off multiple expansion and, probably a bit more worrying for silver investors, the silver price not actually running neck-in-neck with the gold price,” the analysts said in a note.

They suggested that some of the silver equity strength is due to expectations that silver will outperform gold in the near future after underperforming so far this year. But they are not convinced that will happen. They believe industrial demand for silver will be lower than many other experts anticipate, and they think investment demand needs to significantly rise to keep the market from moving into a material surplus in 2014 and thereafter.

“A flat ETF profile is not good enough; it has to keep growing to justify the current or even higher silver price,” the CIBC analysts wrote.

They downgraded Fortuna Silver Mines Inc. (to sector perform from outperform) and Fresnillo PLC (to sector underperform from perform). But they upgraded Pan American Silver Corp. to sector perform from underperform, noting the company has strong organic growth potential and has made good progress in reducing costs and boosting cash flow.

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